15 October, 2020
- DNS Mains Answer Writing
- Self-Assessment Test
- The RBI tunes in to the economy- Benefits and Challenges of Inflation Targeting (Indian Economy)
- Phased manufacturing policy that is hardly smart (Indian Economy)
- J&K, Ladakh women to benefit from rural scheme: NRLM-DAY (Polity & Governance)
- Public debt ratio to rise to 90% of GDP on Covid (Economy)
- Release of Pulses from Buffer stock (Economy)
- Cabinet approval for school education reform project (Polity & Governance)
- Question for the Day
UPSC Current Affairs:RBI tunes into the Economy | Page - 07
UPSC Syllabus: Mains: GS Paper III – Economy
Sub Theme: Inflation in the Economy| UPSC
In News: The RBI plays a multidimensional role in the economy. It regulates the money supply in the economy; influences the rate of interest on borrowing and lending money; controls the rate of inflation; manages the external sector including the exchange rate; supervises and regulates the banking sector and seeks to ensure financial stability.
One of the most critical functions of the RBI is the Inflation Targeting as provided under the Monetary Policy Framework Agreement signed between the RBI and Government in 2015.
Some of the critics have pointed out that the Inflation Targeting has certain fundamental flaws which can hinder the economic growth and development in an economy. On similar lines, the critics have also pointed out that RBI's excessive emphasis on inflation targeting has led to neglect of other crucial regulatory functions. It is evident in the number of bank fraud cases in the recent cases such as PNB Fraud case, PMC Bank Crisis etc.
In this regard, let us understand about various aspects of Inflation Targeting such as Rationale, Problems and Challenges and Way Forward.
What is Inflation Targeting?
Inflation Targeting is monetary policy framework wherein the Central Bank of a country focuses only on maintaining the rate of Inflation within a targeted range. It is believed that increasing prices in an economy create uncertainties in decision making, adversely affecting savings and encouraging speculative investments (such as buying Gold). Inflation targeting brings in more predictability and transparency in deciding monetary policy.
Inflation targeting was first adopted by New Zeeland and subsequently, a large number of countries including India have been following Inflation Targeting as their core element of monetary policy.
In case of India, the Inflation targeting was introduced through the Monetary Policy Framework Agreement signed between the RBI and Government in 2015. As per terms of the agreement, RBI's primary objective would be to maintain price stability, while keeping in mind the objective of growth. The RBI is required to maintain rate of inflation of 4% with a deviation of 2% i.e. inflation has to be maintained between 2% to 6%.
Benefits of Inflation Targeting
Enhanced Transparency: The Inflation targeting explicitly states as to what would be the targeted rate of Inflation in an economy. Such explicitly mandated targets brings in more amount of clarity and predictability with respect to the rate of Inflation and monetary policy formulation.
Promote Growth: A high rate of inflation leads to decrease in the purchasing power of currency, reduces the savings and investment rate, increases the unemployment and leads to overall decrease in the GDP growth rate. Further, high rate of inflation is accompanied by higher levels of Fiscal Deficit and Current Account Deficit leading to an adverse impact on the macro-economic stability of the country. Hence, low and moderate level of inflation would incentivise the investors to undertake the investment in the economy leading to the promotion of higher growth and development.
Autonomy and Accountability of RBI: As per the Monetary policy framework agreement, the RBI has been given complete autonomy in maintaining the rate of inflation within the mandated targets. If the RBI fails to maintain the Inflation within the target, then it would be required to submit in writing, the reasons for its failure.
Such a provision enables the RBI to enjoy autonomy and at the same time, the enables the Government to have enhanced accountability over the actions of the RBI.
Empirical Evidence: The Inflation targeting has been quite successful in some of the advanced economies such as UK, New Zealand etc. These advanced economies have been able to maintain moderate rate of inflation for a much longer time leading to increased macro-economic stability.
Problems and Challenges with Inflation Targeting
Disregards the Multi-faceted role of RBI: In an developing country like India, it is not practical for the central bank to focus exclusively on inflation without taking into account the larger development context. The RBI needs to balance between growth, price stability and financial stability.
No Clear link between Price Stability and Financial Stability: Prior to 2008 Global Financial Crisis, advanced economies were able to maintain moderate rate of inflation for a long term mainly due to adoption of Inflation Targeting. It was believed that Inflation targeting was responsible for overall macroeconomic stability of the country. However, the 2008 Global Financial Crisis has clearly proved that price stability alone cannot lead to financial stability and the excessive focus of the Central banks on the price stability may lead to neglect of other crucial functions such as regulation leading to the economic crisis. In this regard, former RBI Governor Subbarao has highlighted that there is a trade-off between price stability and financial stability, and that the more successful a central bank is with price stability, the more likely it is to imperil financial stability.
Empirical Evidence against Inflation Targeting in India: The RBI has been able to maintain stable rate of Inflation within the mandated range since last 2-3 years. However, inspite of stable rate of Inflation, Indian economy is facing challenges on multiple fronts. The GDP growth rate has been reduced to 25 quarter low of 5% for the first quarter of financial year 2019-20.
The unemployment has increased to 45- year high of 6.1%. There has been contraction in the manufacturing activity as evident in declining IIP. The agriculture sector is staring at agrarian distress. All these clearly highlight that the Inflation targeting has failed to promote growth and development.
Poor Monetary Policy Transmission: The Inflation targeting is more suited to the developed economies since the monetary policy transmission in such economies is quite efficient. However, in case of India, the monetary policy transmission is quite inefficient and this can in turn reduce the effectiveness of Inflation Targeting.
Hinder GDP Growth: In order to contain Inflation, the RBI would be required to increase the rate of Interest by following the contractionary monetary policy. However, such a policy would lead to increase in the rate of interest on the loans leading to decrease in investment and consumption expenditure leading to decline in the GDP growth rates. For example, during 2013-2015, the higher interest rates in the country on account of higher rate of inflation had led to decrease in the GDP growth rates.
Does not address the Supply Side Inflation: Inflation in India may take place due to supply side bottlenecks such as increase in global crude oil prices, poor monsoon, floods etc. For instance, the recent increase in the prices of Tomato and Onions is mainly on account of supply side disruptions. Under such circumstances, RBI would have limited role to play in easing the rate of inflation. Rather, the Government of India would be required to address these supply side disruptions in order to moderate the prices of such commodities.
Post-Global Financial crisis, the dominant view around the world is that flexible inflation targeting, rather than pure inflation targeting is more efficient for Monetary policy formulation. According to the Flexible inflation targeting, the role of the Central Bank would depend on the prevailing rate of inflation in the country. If the rate of inflation is way off target, the primary emphasis of the central Bank would be bring the rate of inflation within a acceptable range. On the other hand, if the rate of inflation is within the range, the central Bank should focus on its other core objectives. Thus, it is being said that the Central banks should focus on flexible inflation targeting rather than pure inflation targeting.
In this aspect, there is a need for greater debate around kind of Inflation targeting in India.
UPSC Current Affairs: Phased Manufacturing Policy that is hardly smart | Page 06
UPSC Syllabus: Mains: GS Paper-III- Economy
Sub Theme: Manufacturing | UPSC
Present Status of Electronics Industry in India
Production of Electronic Goods: The Electronics Industry is one of the fastest growing Industries accounting for 2.3% of India's GDP. The annual production of Electronic goods has increased from $ 30 bn in 2014-15 to $ 70 bn in 2018-19 at a compound annual growth rate of about 25%. Further, India's share in electronics manufacturing has growth from 1.3% (2012) to 3% (2018).
India has also emerged as the second largest manufacturer of mobile phones after China. The annual production of mobile phones has increased from $ 3 bn (2014-25) to $ 24 bn (2018-19) and domestic demand is almost completely met out of domestic production.
Demand for Electronic Goods: The annual import of electronic goods has increased to $ 56 bn due to higher demand. In the last decade (2011-2019), the import of electronic goods grew the fastest from negligible share to 3.6%. China alone accounts for 67% of India's imports. Thus, India has not been able to replicate its success of IT Sector in the Electronics Sector.
Potential for Electronics Manufacturing: India has the potential to replicate China's success and become global leader in the manufacturing of Electronic goods. The increase in the production costs of Electronic Goods in China has made it possible for India to become major destination of electronic manufacturing and exports. Further, India needs to get integrated into Global value Chains by focusing on manufacturing of Electronic components such as Semiconductors. In this regard, the Union Budget 2020-21 has highlighted that "Assemble in India" has to be integrated into "Make in India". The Economic survey has highlighted that this would increase India's export share of the world from current 1.6% to 3.5% by 2025 and 6% by 2030. Further, this would create 4 crore well-paid jobs by 2025 and about 8 crore jobs by 2030.
Details about the new schemes
Phased Manufacturing Programme (2017)
Mandate: Promote Indigenous manufacturing of Mobile handsets and their components such as Charger, battery, Key pad, Touch Panel, printed Circuit Board Assembly, Camera Module etc.
How?: Differential Duty regime: Increase in the customs duty of the goods that required to be indigenously manufactured.
Why is it called Phased?: Sudden increase in the Customs duty would make the raw materials costlier for the domestic manufacturers. Need to progressively increase tariffs and need to progressively increase the coverage of the commodities under the scheme. It is implemented for a period of 4 years. It started with the imposition of customs duty on less sophisticated components such as Battery and then sought to bring in more sophisticated components such as Display panel within its ambit.
Expected benefits: Attract FDI in Mobile handset manufacturing, Reduce Inputs, Promote domestic manufacturing, Value addition, Integrate India into GVCs, Boost exports etc.
Positives: The differential duty approach has helped in increasing the local production of mobile handsets from 11 crore units valued at Rs 54,000 crore in 2015-16 to 17.5 crore units valued at Rs 90,000 crore in 2016-17. The share of imported mobile handsets in total domestic demand is gradually coming down — from Rs 56,000 crore in 2015-16 to Rs 40,000 crore in 2016-17. Firms such as Apple, Xiaomi, Oppo, and OnePlus have invested in India, but mostly through their contract manufacturers. As a result, production increased from $13.4 billion in 2016-17 to $31.7 billion in 2019-20.
Increase in Imports:
India imported INR 47,011 crore mobile-related components in 2014-15 and INR 1,10,042 crore in 2018-19 (increase of 134.1%). One possible explanation of this trend is that manufacturers which export components to India are able to absorb some of the negative impact on their trade margins on account of higher tariffs and reduce the per unit price of their merchandise in order to meet steady demand. The economies of scale therefore continue to work in favour of companies based out of export hubs in countries like China.
Lower Value Addition: Analysis of factory-level production data from the Annual Survey of Industries (ASI) shows that in 2017-18, value addition for surveyed firms (barring two outliers) ranged from 1.6% to 17.4%, with most of the firms being below 10%. For the majority of the surveyed firms, more than 85% of the inputs were imported.
Failure to promote Domestic Manufacturing: Import-substitution has failed to take-off.
Lack of Focus on Exports: Even though there has been increase in exports, the mobile phones exported are low value and hence not much impact.
Production Incentive Scheme (PLI) for Large Scale Electronics Manufacturing
Objective: Production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components including Assembly, Testing, Marking and Packaging (ATMP) units.
Incentives: Extend an incentive of 4% to 6% on incremental sales (over base year) of goods manufactured in India for a period of 5 years subsequent to the base year as defined. The nature of incentives is presently discussed as part of Inter-ministerial consultations. However, the incentives are likely to be in the form of duty Credit Scrips provided under Merchandise Exports from India scheme. ( Duty Credit Scrips are export linked incentive provided to Industries. The value of scrip depends upon the product and country to which goods are exported. These scrips can be used by the exporters to either pay taxes to the government or sell them in the open market.
Financial Implications: The total cost of the proposed scheme is around Rs 41,000 Crores.
- Attract global MNCs such as Apple, Samsung, Oppo etc. to manufacture in India.
- Boost to domestic Industries.
- Assemble in India to be integrated with Make in India.
- Creation of 8 lakh direct and indirect jobs.
Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS)
Objective: To promote the domestic manufacturing of Electronic components and to focus on "Assemble in India".
Incentives: 25% of capital expenditure for the manufacturing of goods that constitute the supply chain of an electronic product. This will cater to all segments of electronics manufacturing such as Mobile Electronics, Consumer Electronics, Industrial Electronics, Automotive Electronics, Medical Electronics, Strategic Electronics, Power Electronics, Telecom Equipment, Computer Hardware etc.
Development of electronic components manufacturing ecosystem in the country and deepening of Electronics value chain.
New investments in Electronics Sector to the tune of at least Rs. 20,000 crores.
Reducing dependence on import of components and thus enhance digital security for India.
Modified Electronics Manufacturing Clusters (EMC2.0)
Background: Earlier, the Ministry of Electronics and Information Technology (MeitY) had notified Electronics Manufacturing Clusters (EMC) Scheme in 2012 to provide support for creation of world-class infrastructure for attracting investments in the Electronics Systems Design and Manufacturing (ESDM) Sector. The EMCs scheme provides grant assistance for setting up of both Greenfield and Brownfield EMCs across the country. The Scheme is open for 5 years till 2022 for disbursement of funds for the approved projects.
Going forward, there is a need for continuation of such a scheme in modified form for further strengthening the infrastructure base for electronics industry in the country and deepen the electronics value chain.
Objective: The Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme would support setting up of both Electronics Manufacturing Clusters (EMCs) and Common Facility Centers (CFCs). For the purpose of this Scheme, an Electronics Manufacturing Cluster (EMC) would set up in geographical areas of certain minimum extent, preferably contiguous, where the focus is on development of basic infrastructure, amenities and other common facilities for the ESDM units.
- Availability of ready infrastructure and Plug & Play facility for attracting investment in electronics sector:
- New investment in electronics sector
- Jobs created by the manufacturing units;
- Revenue in the form of taxes paid by the manufacturing units
UPSC Current Affairs: J&K, Ladakh Women to benefit from rural scheme: NRLM DAY | Page 09
UPSC Syllabus: Mains: GS Paper-III – Economy
Sub Theme: Rural Development|UPSC
Launched as Centrally Sponsored Scheme in 2011 as a restructured version of Swarna Jayanti Gram Swarozgar Yojana (SGSY)
Create efficient and effective institutional platforms for the rural poor to enable them to increase household income.
- Universal Social Mobilisation: At least one female adult member from each identified rural poor household to be brought under SHGs
- Participatory Identification of Poor (PIP)
- Community Funds: Provision of Revolving Fund and Community Investment Funds to SHGs
- Financial Inclusion
- Convergence and partnerships: Convergences between Multiple schemes/ Partnerships with NGOs, CSOs and PRIs.
- Mahila Kisan Sashaktikaran Pariyojana (MKSP): empower women in agriculture by making systematic investments to enhance their participation and productivity
- Start-up Village Entrepreneurship Progam: promote start - up enterprises in rural areas through Seed capital, Training, Market Linkages
- Aajeevika Grameen Express Yojana: Community Investment Fund (CIF) to support the SHG members to operate the public transport services.
- Deen Dayal Upadhyay- Grammen Kaushalya Yojana: Placement linked Skill-based Training Initiative
- Rural Self-Employment Training Institutes (RSETIs): Encourage Public Sector Banks to set up training Institutes to transform rural unemployed youths into Self-Employed Entrepreneurs
- National Rural Economic Transformation Project (NRETP): Externally Aided Project through loan assistance from World Bank.
UPSC Current Affairs: Public debt ratio to rise to 90 % of GDP on COVID | Page 13
UPSC Syllabus: Prelims: Indian Economy
Sub Theme: Public Debt |UPSC
UPSC Current Affairs: Release of Pulses from Buffer stock | Page 10
UPSC Syllabus: Prelims: Indian Economy
Sub Theme: Agriculture |UPSC
UPSC Current Affairs: Cabinet approval for school education reform project | Page 10
UPSC Syllabus: Mains: GS II: Education
Sub Theme: Education development |UPSC
- The STARS program is partly funded by the World Bank
- World Bank will contribute ₹3,700 crore for the project.
- The Union Cabinet has approved a project partially funded by the World Bank to carry out a reform agenda in the governance of school education and improve data and assessment systems at the national level, as well as teaching and learning outcomes in six States, especially for early childhood and vocational education.
Strengthening Teaching-Learning and Results for States (STARS)
- The project includes an emergency response component to help the government respond to disaster situations which lead to school closures and loss of learning, such as the current COVID-19 pandemic, according to an official statement issued after the Cabinet meeting on Wednesday.
- A major component of the project is the establishment of PARAKH ((Performance Assessment, Review, and Analysis of Knowledge for Holistic Development) as a National Assessment Centre.
- Included in the National Education Policy 2020, this autonomous institution under the Union Education Ministry will set norms for student assessment and evaluation for all school boards across the country, most of which currently follow norms set by State governments.
What program want to achieve?
- At the State level, the project seeks to improve education outcomes and school-to-work transition strategies for better labour market outcomes in Himachal Pradesh, Rajasthan, Maharashtra, Madhya Pradesh, Kerala and Odisha.
The funding component:
- STARS project would be implemented as a new Centrally Sponsored Scheme under Department of School Education and Literacy, Ministry of Education.
- STARS project will have a total project cost of ₹5,718 crore, with the World Bank’s support amounting to about ₹3,700 crore ($500 million), said the statement.
The STARS Project has two major components:
- At the national level, the project envisages the following interventions which will benefit all states and UTs:
- To strengthen MOE’s national data systems to capture robust and authentic data on retention, transition and completion rates of students.
- To support MOE in improving states PGI scores by incentivizing states governance reform agenda through SIG (State Incentive Grants).
- To support the strengthening of learning assessment systems.
- PARAKH: support MOE’s efforts to establish a National Assessment Center
- Among the tasks of such a center would be to leverage the experiences of states selected for the operation by collecting, curating and sharing these experiences with other states through online portals (g. Shagun and DIKSHA), social and other media engagement, technical workshops, state visits and conferences.
- Further, the STARS project includes a Contingency Emergency Response Component (CERC) under the National Component which would enable it to be more responsive to any natural, man-made and health disasters. It will help the government respond to situations leading to loss of learning such as school closures/infrastructure damage, inadequate facilities and use technology for facilitating remote learning etc. The CERC component would facilitate the rapid re-categorization of financing and the utilization of streamlined financing request procedures.
- At the State level, the project envisages:
- Strengthening Early Childhood Education and Foundational Learning
- Improving Learning Assessment Systems
- Strengthening classroom instruction and remediation through teacher development and school leadership
- Governance and Decentralized Management for Improved Service Delivery.
- Strengthening Vocational education in schools through mainstreaming, career guidance and counselling, internships and coverage of out of school children
The STARS project also aims to focus on initiatives of PM e-Vidya, Foundational Literacy and Numeracy Mission and National Curricular and Pedagogical Framework for Early Childhood Care and Education as part of the Atmanirbhar Bharat Abhiyan.
Some of the measurable outcomes of the project are Increase in students achieving minimum proficiency in grade 3 language in selected states, Improvement in secondary school completion rate, Improvement in governance index scores, Strengthened learning assessment systems, Partnerships developed to facilitate cross-learning between states, and improvement in the State level service delivery such as Strengthening planning and management capacities for decentralized management by training of BRCs and CRCs, Strengthened school management by training of Head Teachers and Principals for improved education service delivery.